Japan's Central Bank Changes Easy Money

Japan's central bankers made a course change meant to please both politicians and economists. The Bank of Japan announced it will slowly let interest rates rise and gradually close the spigot that has sent a flood of excess cash into Japan's banking system during the past five years. The balanced approach is being cheered by Japan's government and investors.

It was a Japanese-style compromise - one that appeases both politicians as well as demonstrates the central bank's independence and its intention to prevent inflation.

The Bank of Japan on Thursday declared an end to five years of ultra-easy monetary policy, which kept interest rates effectively at zero. But the central bankers also said they will not immediately raise rates.

The central bank governors also said they will adopt what is called a reference rate for inflation - in essence aiming to keep price rises between zero and two percent a year.

Chief Cabinet Secretary Shinzo Abe says the government respects the bank's decision. Abe explains that Thursday's action shows a shared economic view with the government. He adds that the decision to use an inflation reference rate is good because that will make the central bank's monetary policy more transparent.

The once booming Japanese economy slumped sharply in the 1990s. For most of the past 15 years, the economy was either in recession, or showed minimal growth.

The B.O.J. adopted its extremely loose monetary policy in 2001, after two years of deflation - falling prices. At the time, the country's banks were struggling with massive bad debts and a tight money supply. By keeping interest rates low and flooding the system with cash, the central bankers hoped to keep the banks afloat and encourage spending and investment.

Despite government data showing that Japan is emerging from its slump and deflation is ending, influential politicians have urged restraint on monetary policy. They fear that raising rates could cut consumer spending and would make it more expensive for the government to pay off its massive debt.

On the other hand, the B.O.J. governors are concerned that keeping the loose policy too long might trigger inflation and create a bubble in real estate prices.

Stock market investors seemed to approve of the policy change. The benchmark Nikkei index closed up 409 points Thursday, more than a 2.5 percent gain, sending the Nikkei above the 16,000 yen line for the first time this month.